Could a Netflix-cable alliance spur HBO to go rogue?

A potential alliance between online video streaming company Netflix Inc <NFLX.O> and cable companies could spur cable television’s biggest premium player HBO to consider its options beyond the set-top box and go directly to customers on the Web.

But not anytime soon.

Analysts say Time Warner Inc’s HBO, which has more than 28 million customers through its cable, satellite and phone partners, would be in no hurry to risk hurting their very profitable business based on a perceived threat from Netflix or any other newcomers.
“Why fix it if it’s not broke,” said Standard & Poor’s analyst Tuna Amobi. “You’re virtually jeopardizing billions of dollars, it seems remote from our perspective.”
People familiar with HBO executives’ thinking say this has been looked at and they ‘have done the math’ and are even more sceptical it makes sense.
Yet the question, which is often asked, comes up again with the news that Netflix Chief Executive Reed Hastings has opened early talks with cable operators for a partnership.

Reed Hastings, Netflix Chief Executive

If these Netflix talks come to fruition the alliance could start out as a billing partnership — with Netflix appearing as a line on cable customers’ bills. But the talks have also encompassed the possibility of Netflix shows one day being offered on-demand say people familiar with the talks.
On a financial basis the two could not be more different. Netflix has warned investors it will likely turn in a loss this year, while HBO will likely grow its $1.5 billion in operating profits. In creative terms, Netflix is dipping its toe into producing original shows, while HBO is a record-breaking Emmy-award winner nearly every year.
The concern for cable investors is that even though Netflix is still seen as a poor man’s HBO, with its package of older TV series and movies with few original shows, it will compete on a level playing field in the battle for customers’ time on a set-top box.
Hastings frequently says Netflix will look more like HBO in the future. Last month, his company launched ‘Lilyhammer‘, the first of five new original series on its service and likely will look at more as it tries to give its customers reasons to stay on even as programming costs rise.
But in a potential partnership with cable, Hastings focus will primarily be on pay television’s 100 million home distribution.
“We believe distribution agreements with the cable providers could materially increase Netflix’s subscriber base in a relatively short period of time,” said Barclays Capital analyst Anthony DiClemente. “The question for Netflix, however, is how to reach greater scale without sacrificing all the economics to its cable partners.” Such a partnership could also lower acquisition costs and improve profitability he added.
Even after guessing a fairly high overlap between Netflix’s 23 million subscribers and those homes. There would still be plenty of room for growth if Netflix is offered as some sort of discounted add-on deal to consumers.
“Netflix is at a point where they are trying to get as much distribution as possible. However, I think Netflix needs the cable distributors more than vice versa,” Morningstar analyst Michael Corty said.
Such a deal would not be a million miles away from something Comcast Corp <CMCSA.O> has already been announced the launch of Streampix, a Web-based extension of its on-demand programming with a wide range of older TV shows and movies.
Perhaps the earliest example of how this could work is seen with the lastest version of Apple Inc’s <AAPL.O> Apple TV set-top box, which now allows users to sign up and get billed directly for Netflix through the box.

All in all, HBO bosses might end up having to take heed from a character in their award-winning show ‘The Wire’ and understand the “game done changed.”